Reason Foundation

Free Trade Agreement Review Series: South Korea-U.S.

The White House is officially submitted to Congress on Monday the three free trade agreements on which it has completed negotiations for ratification. We and other groups encouraged the President to include putting a priority on ratifying the trade agreements as a part of his jobs plan announced last month (see our short-term ideas for employment growth). Federal programs are not what gets the jobs market moving again, but they will help some, and they will not hurt the long-term employment outlook in America, particularly because free trade deals allow less expensive exports (with tariffs removed) to replace less efficient production of goods in the U.S. and free up that labor for more productive capacity.

That being said, these free trade agreements (FTA) are not perfect, and in the spirit of rational expectations, we wanted to provide a brief overview of what is in these FTAs and what we should anticipate their benefit to the American economy and jobs market will be. Today we begin a three part series, and will have a new post up tomorrow and Thursday to complete the series.

Hailed as “the most commercially significant free trade agreement (FTA) in more than 16 years,” under the pact, 95 percent of consumer and industrial imports between the U.S. and South Korea will become free of tariffs, quotas and everything in between within 3 years. The majority of the remaining duties will be erased over a 10-year period. The U.S. International Trade Commission estimates that the FTA will increase exports by at least $10 billion, and will open up Korea's $560 billion service industry to American businesses.

In 2008, the manufacturing of goods to be exported to Korea utilized the employment of 230,000 Americans and the removal of tariffs will surely translate into more business and jobs. For instance, one of America’s top exports to South Korea is aircraft, which means more customers for Boeing as the company prepares to unveil the Dreamliner 787. American agriculture, machinery, and chemicals are also expected to see growth rates.

Lower tariffs also will mean lower prices on goods such as Kia automobiles, exported to the U.S. Contrary to critics, this will not necessarily mean fewer sold American made cars. The money saved for consumers on the price reduction from the tariff removal can be used to consume more in the economy (possibly American made goods), driving production in general, and putting money in the pockets of other workers/consumers who may very well buy Fords or Chevys.

Critics of the U.S.-Korea FTA also note that the textile, electronics, and floral industries will see higher competition because of the trade deal. But it's important to note that tariffs aren't a zero-sum game: free trade works because it allows the market to shift resources to companies who are more productive, and more production equates to lower prices and higher standards of living.

The removal of trade restrictions would undoubtedly force some American businesses to either cut production or make new products as money goes to the most efficient use in the market. Some may even need to close shop, which is why the Trade Adjustment Assistance program was created to provide unemployment benefits and training for new jobs (we personally oppose at TAA program as an inappropriate use of federal resources, but we will point out that certain individual do benefit in the near-term from the program as long as it exists). TAA also helps affected businesses receive financial assistance to help with production changes. Apparently, though, this is not enough, as one of the main things stalling confirmation of this and the other three trade agreements is that the Democrats want to expand the TAA program and the GOP doesn’t want more spending. A compromise appears close on that issue, but the details are not clear yet.

At the end of the day, the TAA program is merely welfare to businesses and jobs that benefited from tariffs at the expense of American consumers. Put another way, any workers that lose their jobs because of this FTA work for companies that do not produce efficiently, which is why they will lose business.

The Free Trade Agreement between the US and South Korea is still a step in the right direction, but the strings attached to it will put the American economy a half step back from where it could be. Expanding the TAA program would also add millions to the deficit and boost inflation.

Next up, tomorrow we look at the Colombia-U.S. trade pact. Later on this week, we will then review the Panama-U.S. trade deal.

Update 10/5:

In the legislation approving the Korea-U.S. trade deal, there are some tax provisions tucked deep down. First, the bill proposes federal and state prison agencies annually provide "certain information on their inmates to reduce improper payments sent to prisoners" according to Real Time Economics. Second, the bill would "increase the penalty for paid tax return preparers who don’t make all the necessary checks when applying for a refundable tax credit." Third, the deal would "increase beginning in 2013 the penalty to $500 from $100 for paid tax preparers who don’t perform all the due diligence required for the earned income tax credit." The logic behind these provisions is sensible:

By making sure that certain tax refunds aren’t going to people who aren’t eligible, the measures are expected to offset the cost of the trade deals. The trade agreements with Panama, Colombia and South Korea would otherwise formally add to the deficit, since the deals would lower tariffs on imports from the three countries, though lawmakers from both parties have said they expect the deals to result in thousands of new jobs. Tariffs on U.S. exports would also be lowered in the agreements.

Lawmakers and Obama have long had their sights set on reducing improper tax payments. The Internal Revenue Service pays out roughly $11 billion to $13 billion per year to people who have improperly claimed the earned income tax credit, according to the agency’s estimates, cited by the Treasury Inspector General for Tax Administration. Prisoners are among those not eligible for the earned income tax credit, but some have received tax refunds by filing false returns.